Amtrak off the rails?

Stocks rose yesterday in an up-and-down session as traders continued to waver over Tuesday’s hot CPI print. PPI, which is a leading indicator of CPI was released yesterday and it foretold of possible improvements in consumer inflation… down the road.

Pace yourself. Inflation is often thought of as being consumer driven. When things are good, we, as consumers, seek to consume more and the increased demand causes prices to rise. Classic. This strain of inflation that we are facing today, however, goes far beyond yours and my shopping habits. Recall, if you will, all those stories or supply chain problems that marred most industries late in 2020 through mid-2021. You could almost count on hearing a salesperson say something to the effect of “sorry… you know, supply chain problems… from COVID.” That was the stock answer you would get when the product you were seeking was either unavailable or, even more importantly, significantly marked up. Remember negotiating for a discount when shopping for autos? Of course, you don't. Nowadays, you can expect to pay over sticker price. “…you know, supply chain problems… from COVID.” A good friend of mine recently bought a new luxury car from a high-end manufacturer known for generations of precision engineering and quality. He relayed that he was surprised that when he went to pay for the vehicle, the dealer gave him a sizeable discount off his agreed-upon price. Confused, he inquired about the discount. When he heard the answer, he was gobsmacked. The company gave him a discount because the car… a high-end, imported luxury car… came without electronic seat adjustments. The buttons were there, mounted on the sleek, wood-paneled door, but manipulating them would prove useless. The reason? Missing semiconductor chips. The manufacturer decided to ship the auto, without the feature rather than stall its production line. “…you know, supply chain problems… from COVID.” Ok, now you remember. Those supply chain problems became the seed which ultimately bred the current runaway inflation we are now experiencing. Unfortunately, the Fed’s inflation-fighting activities have very little impact on the supply chain as they are designed to provide pain to consumers and to a lesser extent, companies. There is some good news. Supply chain problems ultimately work themselves out, but it takes patience. Yesterday, we got some news that our patience may be paying off. The Producer Price Index / PPI is a measure of input costs borne by producers, as its name implies. We know that any time a producer’s costs go up, its reflex response is to pass it along to the consumer… inflation. We would therefore be glad to see producer cost hikes to slow in growth. Yesterday’s headline PPI read came in at +8.7%, lower than expected and lower than the prior month’s +9.8% growth. Though a good portion of the pullback is due to declining energy prices, cost reductions of any type are ultimately good for consumers, and the slowing trend is certainly hope-inspiring. The story, unfortunately, doesn’t end there.

You may have picked up on a brief mention of a potential rail workers strike / lockout in the NXT UP section of my yesterday’s note. A nearly 2-month negotiation between a rail workers’ union and freight companies has not gotten much press until yesterday when Amtrak announced that it would cancel some long-distance routes in order to prepare for a potential lockout. A lockout will have far greater implications beyond passenger service as some 30% of America’s goods travel by rail. Experts estimate that a rail workers strike would cost upward of $2 billion a day. Wanna guess who is going to pay for that? Ultimately, you and I. Yes, a rail strike would be highly inflationary. Did you know that ethanol, used to create our much-beloved gasoline, travels primarily on US rails (70%). A strike can mean short supply, which leads to higher prices. How about the coal used in power generation? It too relies heavily on the rail system. Same story… different household bill. So, what are the rail workers’ unions asking for? Higher wages and less hours. Both sides have until 12:00 AM tonight to reach an agreement. The Biden Administration has been actively involved in the negotiation and has already proposed a wage hike, which both sides have agreed upon. Regarding schedules, that has yet to be worked out, and will prove far more difficult. WHILE YOU SLEPT, both sides appear to have struck a tentative deal, which is positive, though a complete deal to avert a lockout has not yet been announced. The bottom line. While a snag in the supply chain may be ultimately averted, the solution involves shippers taking on greater expenses in wage hikes and less efficient staffing requirements. Remember who ultimately pays for increased producer costs?

YESTERDAY’S MARKETS

Stocks wavered back and forth yesterday ultimately climbing in the session as traders waved good news of lower producer prices with bad news of higher consumer prices. The S&P500 rose by +0.34%, the Dow Jones Industrial Average climbed by +0.10%, the Nasdaq Composite Index advanced by +0.74%, and the Russell 2000 Index traded higher by +0.38%. Bonds gained and 10-year Treasury Note yields were unchanged at 3.40%. Cryptos slipped by -0.78% and Bitcoin lost -1.45%.

NXT UP

• Initial Jobless Claims (Sept 10^th) is expected to come in at +227k, slightly higher than last week’s 222k.
• Retail Sales (August) may have slipped by -0.1% after remaining unchanged in July.